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But Australia is a small country, and the pool of funds
looking for good investments is vast, particularly with global interest rates
so low. As a result, foreign investment into Australia can be particularly
sensitive to returns. Company tax clearly has an impact on these returns. But
Australia’s company tax system is uncompetitive, and becoming more so as other
countries cut their tax rates (as outlined in the research report The Case
Against Tax Increases in Australia, publishing June 7). This may be one reason
why non-­mining investment is falling, despite the end of the mining boom.

The benefits of addressing this investment problem are shown
in Treasury modelling. Lower tax equals more foreign investment; more
investment means a bigger economy, which generates gains for wages, incomes and
even a gain to government revenue (or a fiscal dividend), partly offsetting the
costs.

Employment is missing from this list, but this is actually a
result of the models assuming that there is full employment. If there is an
unemployment queue, then a tax cut will provide more jobs. So write that up as
an underestimate of the benefit of a tax cut.

A central part of these models is the company tax imputation
system, which taxes distributed profits at an Australian shareholder’s marginal
tax rate. A high, low or zero company rate makes no difference to the taxation
of distributed profits. This also means the windfall gain to Australian banks
from a tax cut is not large, contra the arguments of the Opposition leader.

Does this mean that the company tax rate doesn’t matter for
Australian shareholders? No. Undistributed profits are affected by the company
rate. Listed companies retained about one third of profits on average from 2005
to 2015, according to the Reserve Bank, while ATO data suggests the average for
all companies is about 45%. Effectively, the impact of the tax rate grows as
income is retained longer.

Modelling results broadly include retained income on the
cost side, but assume it away on the benefits side — so omitting another
benefit of a company tax cut: increased incentives to invest out of retained
income. Write that up as another underestimate, please.

Imputation generates a tax offset in Australia; there is
another offset, which is for profits repatriated to the United States. For US
multinationals, if tax payments in Australia are reduced, this could be fully
offset by an increase in US tax. So does this mean that US companies are
indifferent to Australian tax rates? Very clearly no. Apple, Google, Uber,
Microsoft and Chevron obviously care: the accusations that they avoid
Australian tax are endemic, see for example the Senate Inquiry into tax
avoidance. 6/13/2016

If there is an unemployment queue, then a tax cut will
provide more jobs. So write that up as an underestimate of the benefit of a tax
cut. ­These companies wouldn’t avoid Australian tax if it made no difference to
their worldwide tax payments. So most, if not all, US companies do feel the
impact of Australian tax rates. They can postpone, almost indefinitely, the US
tax offset by ensuring that Australian income is not repatriated to the US, and
when they do repatriate, the offset is often not one­for­one. Hence, the Henry
Tax Review was fairly dismissive of this issue, as was a discussion in the New
Zealand context by tax academic George Zodrow.

As noted earlier, the costs of a company tax cut are partly
returned through higher economic growth. This fiscal dividend is also increased
if the tax cut results in less tax avoidance, a likely result given the
(allegedly massive) avoidance of US multinationals.

Modelling by Independent Economics has most of the fiscal
dividend of a company tax cut coming from reduced tax avoidance. If this result
is seen as implausible, then look to Treasury modelling: they have most of the
fiscal dividend coming from growth and less than 30% (probably much less)
coming from reduced tax avoidance.

Based on this Treasury modelling, the cost of the tax cut,
net of the fiscal dividend, is $4.2 billion. The modelled increase in national
income is about $11 billion: a benefit that is more than 2.6 times the cost.
The modelled increase in GDP is $18.1 billion, more than 4.3 times the cost.
Clearly a beneficial investment, particularly given that the modelling results
are likely to be underestimates as argued earlier.

On this basis, a company tax cut is a particularly valuable
policy for Australia’s economy — and should remain a priority.

This article was first published in the Australian Financial
Review. Michael Potter is an economist working in Sydney. He has worked for the
Parliamentary Budget Office, the National Farmers' Federation, Australian
Chamber of Commerce and Industry and as an adviser to the federal Coalition. He
has worked at the Federal Departments of Treasury, Environment (advising on the
Murray­Darling Basin Plan) and Prime Minister & Cabinet (where he advised
then Prime Minister John Howard on the introduction of the GST). He has
recently published a critique of Thomas Piketty's Capital in the Twenty­First
Century.